Recognizing Real Estate Fraud

Knowledge is power, and it’s the best way to eliminate fraud in the real estate industry.

Recognizing Real Estate Fraud

by Ralph R. Roberts

Every day, in every city all over the country, real estate industry professionals participate in fraudulent transactions.

Many are fulfilling a carefully orchestrated scheme, while others are sincerely unaware that their actions could bring them fines, loss of licensure, or even jail time. They believe what they’re doing is legal and condoned because “so many established people are doing the same thing.” The key to preventing and detecting fraud is knowledge – by understanding what fraud is and how it works you can protect yourself, your business, and your customers.

No matter what your role is in the deal, you have the unique opportunity to affect the validity of a homeowner’s real estate transaction, simply by touching the application. Each one is an opportunity for an honest loan, and each person your customer works with has a responsibility to continue that transaction with the same integrity. As the borrower is handed off from Realtor to loan officer to processor to underwriter to lender to title and escrow, there are hundreds of occasions for fraud. When you know what to look for (and refrain from infringing on the law yourself), you can have a significant positive impact on the quality of your business.

Although mortgage fraud evolves and becomes more complex as technology improves and forgeries are harder to identify, there are still two basic types of real estate fraud: fraud for property and fraud for profit. In a fraud-for-property transaction, the loan application is completed with falsified information, with the purpose of getting someone into a loan who wouldn’t otherwise qualify. For example, a borrower might provide altered pay stubs, “enhance” their credit score, or claim that their down payment was a gift when in fact it was a loan from a third party (also called a “silent second”). Some applicants commit this fraud on their own and may or may not realize the seriousness of their actions, while others are “coached” by their real estate agent or loan officer to distort the facts. It is often (and erroneously) considered a “victimless crime” because the end result is someone getting the home of their dreams. This is a romanticized notion to say the least. When borrowers purchase homes they can’t afford, they are at an elevated risk of defaulting and foreclosures. True, maybe one delinquency won’t topple the real estate market-but consider that in the last quarter of 2005, the MBA reported a national delinquency rate of 4.44 percent, out of nearly 41 million loans. That’s a big hit for the industry to take.

Alternately, a fraud-for-profit scam is usually designed to manipulate the lender by conspiring with appraisers, straw buyers, or other insiders. These schemes are more difficult to detect because there are often several people involved, and you may not know who’s on the “up and up.” This is why it’s so important to always work with associates you trust and feel confident in. Choosing your appraiser, title company, or other industry party based on price alone won’t help you gauge their values; as in most aspects of the real estate world, strong, reliable relationships are essential. In addition, before you join a new company or meet with a recruiter, try to get an idea of their ethics, procedures, and fraud knowledge. Even if you’re an established figure in the industry, don’t assume that the person you’ve been referring business to for 15 years is immune from fraud. Know your associates and don’t be afraid to tell them when you feel their actions violate the law.

Four common schemes to be on the lookout for include:

Appraisal Fraud: A property is over – or undervalued, often due to pressure from loan originators and real estate agents to alter appraisal reports. This pressure can be negative (yelling or threatening) or seemingly positive (gifts and other illegal kickbacks).

Flipping: A home is purchased and “flipped” or sold immediately for a severely inflated price, often upwards of 30 to 50 percent of the original selling price. That initial transaction is often concealed from the lender. The loan is never repaid and the lender is left high and dry.

Identity Theft: This can range from stealing a customer’s identity, to using false names to take out loans, to appraisers using another’s name to make false valuations. Identity theft happens swiftly, and finding someone who’s real identity you may not know after the loan is completed can be nearly impossible.

Straw Buyers: One person (or company) pays someone else to pose as the home buyer, using their own information and credit score to purchase a property. The scammers then take over the title and mortgage. Essentially, the lenders think they’re loaning money to one person, when in actuality, the home will be owned by someone else.

Preventing Fraud

In 2005 there were over 21,994 suspicious activities reports filed within the real estate industry, yet only three percent were ever investigated. Imagine if you only completed three percent of the items on your to-do list-you’d be frustrated, scrambling for resources, and in need of serious help. That’s how the Financial Institution Fraud Unit of the FBI feels. Without adequate resources, or an agreed-upon way to fund all of these cases, the FBI and other enforcement officials are left treading water.

So what can you do? Take action when you suspect fraud. Do your due diligence on every single real estate transaction that comes across your desk to catch false information before a loan closes, whatever the likelihood of fraud. You never know who else is involved in the deal, and what ulterior motives they may have. Check the property’s background, look for recent sales, and get a second appraisal if you feel the numbers just don’t add up. Ask for back-up verification on any questionable information.

If you know someone has committed fraud, report it. If you let it go, you can bet that person will go on to take advantage of another unsuspecting company. I recently spoke with a mortgage broker who found that one of his originators was going back through old files and enhancing the clients’ credit scores using his personal credit. The loan officer was fired, and he promptly went down the street to set up business again. The broker chose not to report the fraud because he “didn’t want a state investigation.” He ended the loan officer’s career within his company, but allowed him to go on to presumably continue his fraudulent practices and teach others how to do the same thing. This is why it is crucial that you file a fraud report without fear of retaliation or “making waves.” While you won’t necessarily be considered an “accessory” to the crime simply by looking the other way, you will be effecting the industry as a whole, now and into the future. The FBI stresses that self-policing within the real estate world is the best defense we have against the influx of fraud that threatens every deal we make.

Foreclosure Fraud Is Within Real Estate Fraud

Which comes first, Foreclosure Fraud or Real Estate Fraud? Believe it or not, foreclosure fraud comes first! Most people think that purchasing real estate comes first, because foreclosure happens after you purchase your home or commercial property. From the closing, the bankers gamble on every home or property going into foreclosure. The banks buy extra insurance besides the one you pay for in your monthly payments under homeowner’s insurance in order to start the future foreclosure action.

1. What is Real Estate Fraud?

2. Does Real Estate Fraud contain Appraisal Fraud?

3. When does Foreclosure Fraud begin?

4. What can I do about the foreclosure fraud?

The legal definition of Real Estate Fraud is any false representation of a matter of fact, whether by words or conduct, or concealment or nondisclosure coupled with intent to deceive made in conjunction with a real estate transaction and is reasonably relied on as truth. Also, any act, expression, omission, or concealment calculated to deceive another to his or her disadvantage the affirmative defense of having acted in response to a fraud. (Source: Online legal dictionary)

Yes, Real Estate Fraud does start with the Appraisal Fraud. This fraud starts the moment the bank or lender hires an appraiser to appraise the home or commercial property at the asking or purchase price instead of the true current market value. It is a fact that the realtor and appraiser has the same Multiple Listing Service, MLS, in which to find the true current market value of a property. The realtor will list the property at the highest amount to receive more commission. The Appraiser will appraise the property always at the asking of offering price so the lender or bank can make more money in interest rates. As a now inactive Realtor, after many years of activity, I have never seen any property appraised at the current market value!

The foreclosure fraud begins when an offer is accepted by the seller and the buyer begins to complete the purchase paperwork to get financing. In the very first part of the transaction, you are given a virtual stack of papers placed in front of you and instructed where you are to start signing or initialing on those “closing documents”. There are so many different documents with enough legal language that you could have read for hours just to get through them the first time, much less begin to fully understand them. You are not given a copy of all these documents at least 3 to7 days prior to the closing, so you can read and study these documents to fully understand what it actually is that you are signing and agreeing to? That has never happened for the average consumer and purchaser of a property in my many years of being a Realtor. WHY? You have a stack of documents placed before you at the “closing” that you haven’t ever seen before and are instructed where to sign or initial to complete the transaction and get your new home usually within 30 minutes from a stranger you have never met. You depend on the real estate agent, in most cases, to bring the parties together at the closing after you have supplied enough financial data and other requested information so that the “lender” can determine whether you can qualify for their loan.

Obviously you have the three day right of rescission, if you knew but was not disclosed, even though it was in the endless stack of documents that you signed, but you don’t stop to read all the documents after you have just purchased your home and want to move in? Something being wrong with what we have just signed is not a primary thought in your mind at that time? Did you trust the people involved in the transaction? Are you naturally focusing on getting moved into your new home and getting settled with your family? This is where the foreclosure fraud and real estate fraud begins without proper disclosure to you given by the closing agent, as usually he or she is the only one in the room at your closing with no witnesses that appear on your mortgage contract..

You can do a few things about the foreclosure fraud. The first thing is to not buy a home or commercial property unless you pay cash for the property. This is not very feasible, is it, since not many people have the cash to buy a property? The second thing is to contact a mortgage lien release company for help. These professionals will guide you through the three phase process that can get your home or commercial property free and clear of any mortgage lien. Be sure to do your research first.

Do you remember the Foreclosure Fraud Within Real Estate Fraud in the legal definition? This is actually where the foreclosure fraud and real estate fraud begins, not to mention the appraisal fraud perpetrated by the banks and lenders

Protect Yourself From Real Estate Fraud

I view my tent ministry as a real estate professional as an honorable job. I am helping people who are in distress get a new piece of mind. On a broader sense, owning a piece of property is part of the American dream. Sadly, there are vultures out there that want to prey on the innocent with things that sound good but are pure trouble. I recently read an article by the Department of Real Estate of California and I thought I would share a few pointers with everyone.

(Note – this is written from a California standpoint, most pointers should be applicable anywhere in the US but check with a RE agent in your area if you have specific questions.)

Does a person who helps me with a short sale have to be licensed by the state?

Yes, any person who “negotiates loans…or perform services for borrowers or lenders…in connection with loans secured directly or collaterally by liens on real property… for or in expectation of compensation” must be licensed.

What is that in English? If a person wants to help you negotiate with a lender in regards to a property – that person must be licensed. This applies to anyone who wants to talk to your lender(s) on your behalf in regards to a loan secured by property.

Application – we are seeing ‘short sale negotiators’ as a new business. If they cannot produce a DRE license number then run. Also, once they give you a license number check it out against your state’s real estate license database. Some of these negotiators hire a broker to list the property which is a licensed professional. However, if THEY talk to your lender(s) they too must be licensed.

What should I watch out for if I use a negotiator?

Upfront fees – It is against the law for any person to charge you up front fees in dealing with your loan; whether it is a short sale negotiator or a person helping you with a loan modification.

Signing away your rights – Some of these negotiators require you to sign a document that grants them exclusive rights to negotiate on your behalf. While it is true that you only want one person dealing with your short sale, beware of anyone that wants to cut you completely out of the loop. By law, all offers have to be submitted to you and to the lender.

The fraud we are seeing is the negotiator hides high bids from the lender and only submits low bids. They keep the high bids until after the short sale is complete. They then bring in the high bidder to buy the property.

Example, this negotiator receives a bid for $400,000. They have a friend that gives them a bid for $350,000. They submit the bid for $350,000 and get the short sale completed. Then their friend re-lists the property and they contact the high bidder and sell the property for $400,000. They just made $50,000 at your expense and at the expense of the economic recovery of this nation.

They committed fraud by withholding all offers from the lender; this is a felony. This ‘short sale flip fraud’ is now on the radar of the FBI who is actively seeking out these quick short sale flips.

Can I pay anyone ‘under the table’?

No! In short sale situations there can be more than one lender. Sometimes the second (or more) lender will try to hold up the process and get as much money from you as they can. Payment to any lender outside of the process (under the table) is called fraud.

If a lender, an agent, or other licensed party encourages you to do something illegal do not do it. If it is a lender be sure to disclose this to your agent so they can speak with their broker to see if there is anything legal they need to do. If it is your agent that asks you to do something illegal contact their broker. Fraud in our industry cannot ever be acceptable. You can also report them to the California Department of Real Estate (or whatever your state department is called.) If the offending party is the broker then contact the Department of Real Estate and report the incident.

If you are ever unsure of an action it is best to get advice. It is much better to be safe then to get into serious trouble.

Final Thoughts

In any real estate transaction there are many items that must be done at the right time and in a specific manner. It is very important to your financial future to make sure you are being advised in a proper way. If something sounds too good to be true or it doesn’t quite feel right then caution is recommended.